Is Shareholder Support to Say-on-Pay Waning?

Although shareholders are seemingly up in arms against the skyrocketing CEO pay, the fervor hasn’t translated into much action at the companies. Recent figures from expert groups such as RiskMetrics and Corporate Library reveal a very bleak picture for the ‘say on pay’ proposals triggered by shareholder activists so far this year.

Halfway past through the annual shareholder-meeting season this year, say on pay proposals on executive pay packages have failed to generate widespread support. According to Corporate Library, a watchdog on corporate governance, out of the nine proposals approved so far in 2008 only two have been adopted, while in 2007 at least three companies had adopted the shareholder’s non-binding advisory vote. The two companies, which have adopted the proposals, are Apple and Tech Data Corporation.

Companies That Have Registered a Majority Win

Company

2008

Adopted?

Alaska Air Group, Inc.

55.0%

No

Apple Inc.

50.7%

Yes

Ingersoll-Rand Company Limited

54.0%

No

Lexmark International, Inc.

59.8%

No

Motorola, Inc.

54.0%

No

PG&E Corporation

52.7%

No

Rackable Systems

51.4%

No

South Financial Group, Inc. (The)

51.9%

No

Tech Data Corportion

61.8%

Yes

2007

Activision, Inc.

69.6%

No

Blockbuster Inc.

57.8%

Yes

Clear Channel Communications, Inc.

50.0%

No

Ingersoll-Rated Company Limited

56.7%

No

Motorola, Inc.

54.0%

No

Par Pharmaceutical Companies, Inc.

56.8%

Yes

Valero Energy Corporation

53.0%

No

Verizon Communications Inc.

50.2%

Yes

Source: Corporate Library

Interestingly despite garnering majority votes of more than 50 percent, neither of the companies such as Alaska Air Group (55 Percent), Ingersoll-Rand (54 Percent), Lexmark International 59.8 percent) Motorola Inc 54 percent, among others have expressed their willingness to adopt the vote.

“Special mention should be given to two companies at which shareholder support has topped 50 percent for two years running: Ingersoll-Rand Company and Motorola. Despite the votes, there has been no implementation of €˜Say on Pay’ votes at either company. Further, despite shareholders having approved proposals by a majority vote in 2007 at Activision, Valero Energy Corporation and Clear Channel Communications, the companies have not implemented €˜Say on Pay,’ the corporate library said in its Analyst Alertlast month.

Other firms where advisory vote proposals have gained over 50 percent support include South Financial Group (51.9percent), PG&E Corp (52.7 percent) and Rackable Systems (51.4 percent).

Additionally, the say on pay proposal outcome at some of the financial companies is all the more discouraging for the advocates of the advisory vote. Companies such as Citigroup, MerrillLynch, MorganStanley, Wachovia and U.S.Bancorp have witnessed less support this proxy season than they did last year. According to Corporate Library statistics shareholders at Citigroup rejected a say-on-pay proposal, with 42 percent of shareholders voting in favor of it. That number is down from 46 percent support last year. A similar proposal at Merrill Lynch garnered support from 37 percent of its proxy voters, down from 46 percent last year.

Percentage Of Change In The Shareholder Support For ‘Say On Pay’ At Financial Institutions From 2007 – 2008

Company Name

2008 Vote

2007 Vote

Difference

Industry

Capital One Financial

34.7%

38.1%

-3.4%

State Commercial Banks

Citigroup

41.9%

46.2%

-4.3%

National Commercial Banks

JPMorgan Chase

39.2%

40.6%

-1.4%

National Commercial Banks

Merrill Lynch

37.5%

45.6%

-8.1%

Security Brokers, Dealers & Flotation Companies

Morgan Stanley

37.8%

39.2%

-1.4%

Security Brokers, Dealers & Flotation Companies

U.S.Bancorp

35.4%

42.9%

-7.5%

National Commercial Banks

Wachovia

31.0%

38.7%

-7.7%

National Commercial Banks

wells Fargo

30.0%

35.1%

-5.1%

National Commercial Banks

Source: Corporate Library

“Even though investors blasted executives at the annual meetings of Citigroup and Wachovia “say on pay” proposals at both companies won 20 percent fewer votes than they did a year ago,” RiskMetrics research said.

Shareholders will vote on the proposals again this year at Valero and Clear Channel. Three companies with near-majority support in 2007 (Symantec, 48.6 percent; Sara Lee, 48.5 percent; and Cisco, 47.7 percent) are due for fall annual meetings and it will be interesting to see if €˜Say on Pay’ proposals are reintroduced and can finally achieve majority support.

However, the overall support for the say on pay campaign which is in its third year has grown in terms of the number of proposals made this year reaching 76 (as of June 30) “a large increase over the 53 that made it to the proxy in 2007,” says the Corporate Library alert.

Despite the overall increases in shareholder support, the voting results are mixed at 27 companies with €˜Say on Pay’ proposals on their proxies in both 2007 and 2008. Out of the 27, 17 companies show a decrease in support, while eight show an increase, and two other companies depicted no effective change.

Support At Companies Voting In 2007 & 2008

#

Increased Support

8

Decreased Support

17

Same

2

Total

27

Source: Corporate Library

The reason why “say on pay” has failed to generate wider support has left experts wondering.

Richard Ferlauto of the American Federation of State, County and Municipal Employees, one of the main proponents of say-on-pay votes, blames the rise of the e-proxy this season for posing a hurdle to “say on pay.” The federation, one of the nation’s largest labor unions, is a leader in the rights of shareholders.

But some shareholder activists and corporate governance experts said the lukewarm support highlighted say-on-pay’s shortcomings. Critics said a simple up-or-down vote makes it hard for corporate directors to understand what shareholders find objectionable in often complex compensation packages. “I think it’s a half step. It doesn’t get us ultimately to where we need to be,” says a report in Washington Post quoting Charles Elson, director of the Center for Corporate Governance at the UniversityofDelaware.

Corporate Library also believes that the difficulty in understanding the complex compensation packages could have resulted in the decreased support for say-on-pay proposals. “CEO pay is often cyclical depending on when CEOs decide to exercise options and when the vesting of restricted stock occurs. It is possible that these facts have played a role in the decreased shareholder support for €˜Say on Pay’ at these financial institutions, says Damion Rallis, Research Associate, Corporate Library.

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